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Courts Out of Money & Delaware Law Challenged · Bloomberg Law

0:02
Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
0:08
Speaker 2: Delaware's Supreme Court is going to address the fallout from
0:12
Speaker 2: a trial judge's rejection of Elon Musk's blockbuster pay package,
0:17
Speaker 2: a corporate law overhaul in the state that took effect
0:20
Speaker 2: in March that narrowed the definition of controlling stockholder, making
0:25
Speaker 2: it easier to avoid scrutiny of potentially conflicted transactions. The
0:30
Speaker 2: High Court will decide the constitutionality of that law, as Musk,
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Speaker 2: meta CEO Mark Zuckerberg, and other corporate leaders publicly discussed
0:41
Speaker 2: moving their companies from Delaware to Texas and Nevada. My
0:45
Speaker 2: guest is business law professor Eric Talley of Columbia Law School.
0:50
Speaker 2: So Eric, Delaware Supreme Court is going to decide the
0:53
Speaker 2: constitutionality of SB twenty one.
0:56
Speaker 3: What is SB twenty one.
0:59
Speaker 1: See was a legislative reform that, by historical standards, rocketed
1:05
Speaker 1: through the Delaware General Assembly back in February and March
1:09
Speaker 1: of this year. And substantively, what it did was it
1:13
Speaker 1: basically intervened to push back and on some level to
1:17
Speaker 1: overturn some of the decisions that had been made by
1:22
Speaker 1: Delaware's Chancery court. It's much vaunted corporate law court that
1:27
Speaker 1: deal with how do you sort of judge actions that
1:31
Speaker 1: are taken by someone who is a controller of a
1:34
Speaker 1: company and might be actions that are kind of self
1:38
Speaker 1: serving or have a conflict of interest. So probably the
1:41
Speaker 1: most famous of these was Elon Musk's first compensation package,
1:46
Speaker 1: which was famously overturned by Delaware Chancery Court judge Kathleen
1:51
Speaker 1: McCormick in early of twenty twenty four. There were some
1:54
Speaker 1: other cases that also involved controllers that were, you know,
1:58
Speaker 1: basically litigating a transaction that had a conflict of interest
2:02
Speaker 1: that lost. And that's what this set of reforms did,
2:05
Speaker 1: and it did into it. The first is it basically said,
2:08
Speaker 1: it's much harder for stockholders to challenge various types of
2:13
Speaker 1: conflicts involving that controller, and the traditional protections that had
2:17
Speaker 1: been put up that would allow stockholders an easier rout
2:21
Speaker 1: into court, those were going to get sort of heightened
2:24
Speaker 1: a little bit and the wall was going to be
2:26
Speaker 1: higher to surmount to get into court. And another related
2:29
Speaker 1: reform was that the typical way that some of these
2:32
Speaker 1: stockholders would bring a case against any corporate fiduciary is
2:36
Speaker 1: to use historical rights that they have to get the
2:40
Speaker 1: books and records of the corporation, and that's kind of
2:43
Speaker 1: how they figure out what's going to go into their complaint.
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Speaker 1: And this is a long standing stockholder right. There was
2:49
Speaker 1: a statute that allowed pretty easy access to those things,
2:52
Speaker 1: and that statute itself got amped up to make it
2:54
Speaker 1: harder to get access. So both of these big reforms
2:58
Speaker 1: were a large reform that were pretty much in a
3:01
Speaker 1: pro controller probe defendant direction, and probably as controversially, they
3:09
Speaker 1: not only were so called prospective in nature, but they
3:14
Speaker 1: also applied to any historical cases that involved some conflict
3:19
Speaker 1: of interest a year ago, for example, in which the
3:22
Speaker 1: case hadn't been brought in court yet, so it had
3:25
Speaker 1: this retroactive application as well.
3:28
Speaker 2: Plaintiffs are challenging the law on two constitutional grounds. Explain
3:33
Speaker 2: those challenges.
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Speaker 1: The first is that it was an overreach by the
3:37
Speaker 1: Delaware General Assembly to have a retroactive application of law.
3:43
Speaker 1: The idea is, hey, listen, everyone knew what the rules
3:46
Speaker 1: of the road were when they were acting back in
3:50
Speaker 1: the pre SB twenty one days, and they either complied
3:55
Speaker 1: or they didn't. But to suddenly say the rules of
3:57
Speaker 1: the road have now changed, and we're going to use
3:59
Speaker 1: the new rules to assess prior conduct seemed a little
4:03
Speaker 1: bit off the rails, at least according to the plaintiffs
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Speaker 1: that are challenging this case. And then the second, which
4:09
Speaker 1: in some ways is much more historical, has to do
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Speaker 1: with the fact that what the Delaware Assembly basically did
4:16
Speaker 1: in overturning these chancery court opinions. If you read the
4:20
Speaker 1: text of the statute, it basically says that under certain circumstances,
4:24
Speaker 1: we're not even going to allow the Delaware Court of
4:27
Speaker 1: Chancery to exercise its legal or equitable powers over certain
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Speaker 1: of these cases. And that is an interesting wording because
4:36
Speaker 1: there's some old cases in Delaware, but says, if the
4:40
Speaker 1: Delaware General Assembly tries to limit the equitable jurisdiction of
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Speaker 1: the Court of Chancery, it is a court of equity
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Speaker 1: after all. That's on constitutional under the Delaware Constitution, at
4:53
Speaker 1: least if it's trying to do things that caused the
4:56
Speaker 1: Court of Chancery to have fewer powers than it had
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Speaker 1: in and get this to back in seventeen ninety two,
5:02
Speaker 1: back when the original Constitution was drafted. So those are
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Speaker 1: effectively the two constitutional challenges that the retroactive effect was unconstitutional,
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Speaker 1: and that the handcuffing of the Delaware chance Re Court
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Speaker 1: and the walling off of its ability to exercise equitable
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Speaker 1: powers was also unconstitutional under the Delaware Constitution.
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Speaker 2: Did the Delaware Supreme Court fast track this case?
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Speaker 1: Well, everything about SB twenty one has been fast tracked.
5:31
Speaker 1: So one of the things that that's interesting about the
5:34
Speaker 1: legislation itself is that, you know, corporate law is a
5:37
Speaker 1: pretty technocratic enterprise, and a lot of times, in fact,
5:41
Speaker 1: during the last quarter century, every time that the law
5:44
Speaker 1: has been amended, it's gone through this what's known as
5:47
Speaker 1: the Delaware Council, and it's part of the Date Bar Association,
5:51
Speaker 1: and it's got a bunch of defendant side attorneys and
5:54
Speaker 1: plaintive side attorneys and transactional attorneys and former judges and
5:58
Speaker 1: made debate these things. This particular set of provisions bypassed
6:03
Speaker 1: that Council, went straight into the Assembly, and within a
6:07
Speaker 1: month pretty much had been passed by both houses of
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Speaker 1: the Assembly and signed in to law by the governor.
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Speaker 1: So it was already being fast tracked on the legislative basis.
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Speaker 1: The plaintiff in this case, a company called clearway. Well,
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Speaker 1: the shareholders of that company filed suit shortly thereafter, complaining
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Speaker 1: of conduct that predated all these statutes. And so the
6:29
Speaker 1: plaintiff attorney said, hey, these things are unconstitutional, they shouldn't
6:32
Speaker 1: apply to us, and we want to challenge the constitutionality
6:36
Speaker 1: of the amendments. That is above the pay grade of
6:39
Speaker 1: any of the judges in the Delaware Chancery Court, and
6:42
Speaker 1: which Chancellor basically said, I'm going to just certify this
6:45
Speaker 1: question the Delaware Supreme Court. It had made so much
6:48
Speaker 1: news it really would have been shocking to me June
6:51
Speaker 1: had the Delaware Supreme Court decided they were going to
6:53
Speaker 1: sit on it for ten months or a year, they
6:55
Speaker 1: pretty much had to say, Okay, we're going to take
6:58
Speaker 1: briefing on this reform and we're going to hear argument
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Speaker 1: before year's end so that we can add some clarity
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Speaker 1: to exactly what is Delaware law going forward.
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Speaker 2: So, was this rush to pass the law and then
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Speaker 2: you know, to litigate it. Is it because Delaware fears
7:15
Speaker 2: losing corporations to Texas or Nevada?
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Speaker 1: It certainly had an anxiety vibe to issue. So after,
7:23
Speaker 1: you know, right after the original opinion on Elon Musk's
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Speaker 1: compensation package came out, he took to Twitter, which of
7:30
Speaker 1: course is his right since he owns the company, and said,
7:33
Speaker 1: never incorporate your company in the state of Delaware. And
7:37
Speaker 1: he followed up with several other you know, sort of
7:39
Speaker 1: Delaware hating Delaware rage type of tweets. And you know,
7:44
Speaker 1: mister Musk is a pretty influential person, knows a lot
7:47
Speaker 1: of people, and so all of his friends and associates
7:52
Speaker 1: and prospective associates started saying, wow, I wonder whether he's
7:56
Speaker 1: onto something, started asking their own corporate counsel, should we
7:59
Speaker 1: reincorporate rate outside of Delaware? And my sense is that
8:03
Speaker 1: those questions at least started to really pick up velocity
8:07
Speaker 1: after he started to tweet rage a little bit against
8:10
Speaker 1: the state of Delaware. It never really picked up a
8:14
Speaker 1: huge sense of momentum in terms of actual reincorporations. It
8:19
Speaker 1: was more like a handful of companies decided to reincorporate,
8:24
Speaker 1: and some transactional lawyers reported I would assume truthfully that oh,
8:29
Speaker 1: they were being inundated with questions about it. But when
8:32
Speaker 1: the rubber hit the road, there wasn't an awful lot
8:34
Speaker 1: of empirical support for a rushout of Delaware, though. That
8:38
Speaker 1: clearly was the vibe that was animating both the governor
8:42
Speaker 1: and the General Assembly, and in their view, they just
8:46
Speaker 1: needed to do something, and something quickly to preempt what
8:49
Speaker 1: they had at least become convinced was going to be
8:53
Speaker 1: a mass exodus out of Delaware. Since the statute was passed,
8:57
Speaker 1: you know, it's been constitutionally challenged. Its official status, I
9:01
Speaker 1: guess is still being kicked around a little bit. There
9:04
Speaker 1: really hasn't been that big of an upswelling of companies
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Speaker 1: that have left Delaware to incorporate in Nevada or Texas,
9:12
Speaker 1: which are the two biggest states. You know, you can
9:15
Speaker 1: definitely see a handful of companies that have done so,
9:18
Speaker 1: but it's not been like a gigantic rush. It may
9:22
Speaker 1: actually have picked up even a little bit compared to
9:24
Speaker 1: where it was before the reform. Interestingly enough, a couple
9:28
Speaker 1: of the companies that have reincorporated out of Delaware since
9:31
Speaker 1: the reform said that they were doing so because these
9:34
Speaker 1: new reforms had so many words in them and they
9:37
Speaker 1: were so complicated. They just wanted to sit that dance out.
9:40
Speaker 1: They didn't want to have to bear the risk of
9:42
Speaker 1: figuring out how this new statute was going to get
9:44
Speaker 1: interpreted over the years. So it's been a really interesting
9:48
Speaker 1: debate amongst people who are corporate law nerds, and I
9:51
Speaker 1: unfortunately include myself in that club, June, and maybe you
9:54
Speaker 1: as well. But it really has been kind of an
9:56
Speaker 1: interesting thing to see how this plays out. I think
10:00
Speaker 1: a lot of people, you know, if you ask them
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Speaker 1: two years ago, would have told you, oh, you know,
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Speaker 1: this race, this dance off between different states to attract incorporations,
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Speaker 1: it's not a real thing. Delaware won it seventy five
10:13
Speaker 1: years ago and it's not going to let go of
10:15
Speaker 1: its winning margins. I think that a lot of people,
10:17
Speaker 1: including myself, think, well, you know what, at least the
10:21
Speaker 1: discussion about, you know, effective competition amongst other types of
10:26
Speaker 1: states or other jurisdictions has now become a real thing.
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Speaker 1: You hear it on a regular basis. So it probably
10:33
Speaker 1: is the case that Delaware is more vulnerable than it
10:36
Speaker 1: was two years ago. Where people might differ is whether
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Speaker 1: the vulnerability is due to the cases like the musk
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Speaker 1: compensation case, or is it due to the fact that
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Speaker 1: the Assembly was putting together a slapdash set of statutes
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Speaker 1: that no one knows exactly they're going to work, right,
10:52
Speaker 1: and it might be a combination of both things.
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Speaker 2: Was there another law that had an overhaul because of
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Speaker 2: an unpopular chance re court ruling?
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Speaker 1: There is, interestingly enough, about six months before this SB
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Speaker 1: twenty one reform, there was another reform in around August
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Speaker 1: of twenty twenty four. Now that was a case that
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Speaker 1: itself was responding to a different case, a case involving
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Speaker 1: the Molus Corporation and some side contracts that its founder,
11:23
Speaker 1: Ken Molis had reached with the company that protected him
11:27
Speaker 1: against a whole bunch of different fiduciary duty allegations. The
11:30
Speaker 1: judge in that case basically said, you know, you might
11:33
Speaker 1: be able to do these things, but you can't do
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Speaker 1: it in a side contract. You got to do it
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Speaker 1: in the corporate charter or the bylaws, and basically invalidated
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Speaker 1: those side contracts. And so the twenty twenty four reforms
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Speaker 1: were another, you know, essentially a legislative overturning of a
11:50
Speaker 1: different case. This Molus case came about around the same
11:53
Speaker 1: time as the Musk case came out, and you know,
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Speaker 1: at the time it was quite controversial, but it did
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Speaker 1: go through the Comptle, and it had the sort of
12:01
Speaker 1: the ordinary schedule in being passed. It didn't sort of
12:04
Speaker 1: have this kind of fire alarm exit rush that SB
12:09
Speaker 1: twenty one had. And while people were you know, I guess,
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Speaker 1: busy clutching their pearls over this twenty twenty four reform,
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Speaker 1: which is called SB three thirteen if you're interested in
12:19
Speaker 1: the alphabet soup, suddenly this SB twenty one thing comes
12:23
Speaker 1: along and steals everyone's attention from it. But you are
12:26
Speaker 1: correct that that twenty twenty four reform is still in
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Speaker 1: the mix, and it has some interesting interaction effects with
12:35
Speaker 1: SB twenty one because it basically says, look, regardless of
12:39
Speaker 1: what Delaware is doing in its corporate code, it is
12:43
Speaker 1: now possible to enter into a side contract that might
12:47
Speaker 1: allow you to get around most of the Delaware corporate code.
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Speaker 1: In fact, I've just written an academic paper with my
12:53
Speaker 1: colleague Dorothy Lund that basically says, you know what, Delaware
12:57
Speaker 1: may actually prevail in its first place position in this
13:01
Speaker 1: race because it is basically empowered a bunch of corporations,
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Speaker 1: if they don't like what was happening to Delaware, just
13:08
Speaker 1: to go private and just privatize their entire governance structure
13:12
Speaker 1: coming up next.
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Speaker 2: But is it a bad look for Delaware? You're listening
13:17
Speaker 2: to Bloomberg. In response to a trial judge's rejection of
13:23
Speaker 2: Elon Musk's blockbuster pay package, Delaware's legislature passed a corporate
13:28
Speaker 2: law overhaul SB twenty one narrowed the definition of controlling stockholder,
13:34
Speaker 2: making it easier to avoid scrutiny of potentially conflicted transactions. Now,
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Speaker 2: Delaware's highest court will decide the constitutionality of that law.
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Speaker 2: I've been talking to Eric Tally, an expert in business
13:48
Speaker 2: law and a professor at Columbia Law School. Eric, is
13:52
Speaker 2: it a bad look that the legislature changes the law
13:56
Speaker 2: to make it friendlier to corporations so those core operations
14:00
Speaker 2: don't leave the state.
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Speaker 3: It seems like a bad look to me.
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Speaker 1: Well, there are aspects of that are a bad look.
14:07
Speaker 1: I do want to defend the enterprise of Delaware in
14:11
Speaker 1: trying to keep the franchise alive.
14:13
Speaker 3: Right.
14:13
Speaker 1: The secret sauce of Delaware for a long time was, Hey, look,
14:16
Speaker 1: we're a small state. We don't have a lot of
14:19
Speaker 1: like operating industries in our state that are going to
14:21
Speaker 1: capture our general assembly. So we can basically focus on,
14:25
Speaker 1: you know, trying to formulate the best possible operating corporate
14:29
Speaker 1: law that is possible, and in fact, Delaware benefits quite
14:33
Speaker 1: a bit from that because it's a small state. In
14:35
Speaker 1: corporation fees alone, you know, probably pave half the roads
14:38
Speaker 1: in Delaware, so they really do benefit from the revenues
14:41
Speaker 1: that are raised. On the other hand, in this particular instance,
14:46
Speaker 1: the fact that it was so procedurally irregular, the fact
14:49
Speaker 1: that it really seemed even though the you know, the
14:52
Speaker 1: governor and the state legislators deny this, it seems pretty
14:55
Speaker 1: obvious that the pressure initially was coming from Elon Musk
14:59
Speaker 1: himself and attempting to change law by himself. And the
15:03
Speaker 1: fact that it rocketed through the Delaware legislature incredibly fast,
15:08
Speaker 1: with very few opportunities for critics to, you know, to
15:13
Speaker 1: raise their concerns or to voice their concerns. One of
15:16
Speaker 1: my colleagues testified in front the General Assembly and was
15:18
Speaker 1: literally shouted down and was told to leave the lectern
15:22
Speaker 1: So it really is kind of an interesting moment for Delaware.
15:26
Speaker 1: I don't think the look has been particularly good with Delaware,
15:29
Speaker 1: and that's in some ways one of the dangers is
15:32
Speaker 1: that you can fail to compensate for things that may
15:35
Speaker 1: be emerging problems in the state, but you can also overcompensate.
15:39
Speaker 1: And you know, to add even another complicating factor. The
15:43
Speaker 1: two big cases that were being you know, sort of
15:46
Speaker 1: responded to with these reforms, the Molus case and the
15:49
Speaker 1: Elon Musk case, they still had not at that point
15:53
Speaker 1: gotten to even an appeal before the Delaware Supreme Court.
15:57
Speaker 1: They were still active live cases in the Delaware Assemble
16:00
Speaker 1: was effectively responding to a trial court opinion. If you know,
16:04
Speaker 1: there's a chance a trial court opinion makes a mistake,
16:07
Speaker 1: and sometimes they do. The usual root is okay, appeal
16:10
Speaker 1: it and see what the Delar's Supreme Court does with it.
16:12
Speaker 1: And only then would you want to step in and say, okay,
16:14
Speaker 1: we still don't like what the Delar's Preme Court is
16:16
Speaker 1: going to do, and so we're going to change the law.
16:18
Speaker 1: And so there really was a bit of a rushed
16:21
Speaker 1: kind of atmosphere to this entire ordeal, and I think
16:25
Speaker 1: on some level that probably caused the urgency to escalate.
16:30
Speaker 1: As opposed to the signal that I suspect the governor
16:33
Speaker 1: was trying to send, which is now we're going to
16:34
Speaker 1: move really really quickly to you know, to put this
16:37
Speaker 1: fire out, and putting the fire out, they may have
16:40
Speaker 1: started inadvertently three or four other fires.
16:42
Speaker 2: I mean, it's it's expensive to incorporate in a different state,
16:46
Speaker 2: isn't it?
16:47
Speaker 3: To move states?
16:49
Speaker 1: It can be in a lot of these states. In
16:52
Speaker 1: Nevada and Texas, the expense is actually lower than in Delaware,
16:56
Speaker 1: and Delaware has you know, doesn't charge a ton. The
16:59
Speaker 1: most you're going to pay in an annual franchise tax
17:03
Speaker 1: is like two hundred and fifty thousand dollars, which is peanuts.
17:06
Speaker 1: And it's smaller if you're not a big company. So
17:10
Speaker 1: it really is a scale business. It's not a Delaware
17:14
Speaker 1: does not make all its money from three or four companies.
17:17
Speaker 1: It makes it from the millions of companies that are
17:20
Speaker 1: incorporated there and pay annual franchise taxes. And that's been
17:24
Speaker 1: their entire design. One thing that's kind of interesting about
17:27
Speaker 1: this new competition from Texas and kind of a pre
17:30
Speaker 1: existing but newly invigorated competition from Nevada is that it's
17:35
Speaker 1: not really clear that they are in this game to
17:38
Speaker 1: make money. It seems like they're more in this game
17:42
Speaker 1: almost to rejoin where are you incorporated and where are
17:45
Speaker 1: you doing business? The folks at Texas say, oh, yeah,
17:48
Speaker 1: we want people to incorporate in Texas because we want
17:50
Speaker 1: their factories to be in Texas. And that's kind of
17:54
Speaker 1: a quaint approach, at least by historical standards, because the
17:58
Speaker 1: big innovation that Delaware introduced to the world is you
18:01
Speaker 1: don't have to do any business in Delaware to be
18:04
Speaker 1: incorporated there, and what they specialize in is incorporate law.
18:08
Speaker 1: So some of the most recent competition I think has
18:10
Speaker 1: been hard for Delaware to match up to because it
18:14
Speaker 1: seems to be not about making money, and a lot
18:17
Speaker 1: of these states seem to be interested in kind of
18:19
Speaker 1: keeping the cost down of incorporating. Now, if you're going
18:22
Speaker 1: to reincorporate and you're a public company, that's a very
18:25
Speaker 1: costly process. You've got to put it out in front
18:28
Speaker 1: of the stockholders, you've got to solicit their votes, you
18:31
Speaker 1: have to have long disclosures, and there's a fair amount
18:34
Speaker 1: of rigmarole that goes into trying to figure out how
18:37
Speaker 1: am I going to reincorporate in a different state.
18:39
Speaker 2: So now, as far as SB twenty one, do you
18:42
Speaker 2: think it's unlikely that the Delaware Court will find it unconstitutional.
18:49
Speaker 1: This is a really interesting issue. So the case from
18:53
Speaker 1: which a lot of this comes is a case from
18:55
Speaker 1: the nineteen fifties actually, and that case itself was a
19:00
Speaker 1: controversial case when it first came down. It hasn't really
19:03
Speaker 1: been tested very much, and so I think probably, you know,
19:07
Speaker 1: if are replacing odds, I'd say the chances are probably
19:11
Speaker 1: that the Delaware Supreme Court is going to find a
19:13
Speaker 1: way to either uphold the statute or say, okay, look,
19:18
Speaker 1: technically the statute is not constitutional, but if you put
19:21
Speaker 1: in a small fix to it, like make it an
19:24
Speaker 1: opt in statute or something like that, it would be constitutional.
19:28
Speaker 1: We'll see what happens. But it's interesting that it's had
19:31
Speaker 1: the kind of legs that it has, and in some
19:33
Speaker 1: ways not surprising because really the whole sort of you know,
19:37
Speaker 1: last seven or eight months in corporate law has kind
19:40
Speaker 1: of forced us back into this kind of existential moment
19:43
Speaker 1: of trying to figure out, you know, what is valuable
19:46
Speaker 1: in corporate law and what is it.
19:47
Speaker 3: Do you think we'll see a decision soon on this.
19:50
Speaker 1: We'll see where this goes. My guess is we're probably
19:52
Speaker 1: going to have to wait till the beginning of the
19:53
Speaker 1: new year to see a judgment from the from the
19:56
Speaker 1: Delaware Supreme Court, but they may move relatively quickly given
19:59
Speaker 1: the state involved.
20:01
Speaker 2: Before I let you go, I want to get your
20:02
Speaker 2: input on something totally different.
20:05
Speaker 3: Open Ai is laying the.
20:07
Speaker 2: Groundwork for an IPO that could value the company at
20:11
Speaker 2: one trillion dollars.
20:13
Speaker 1: You can't see me, but I've got my little Austin
20:16
Speaker 1: Powers pinky up against the corner of my mouth for
20:19
Speaker 1: one trillion dollars. So so yeah, so this is this
20:22
Speaker 1: has been a long brewing situation with open ai. You know.
20:27
Speaker 1: When the company began, uh, it had a unique structure, right,
20:32
Speaker 1: and I think some of the founders were quite worried about,
20:35
Speaker 1: you know, the general intelligence of artificial decision makers and
20:40
Speaker 1: whether that caused a risk and so uh they deliberately
20:44
Speaker 1: built into the original structure of open ai what is
20:48
Speaker 1: essentially a ceiling on how profitable it could be for
20:50
Speaker 1: its investors. It was a company and owned by a
20:54
Speaker 1: nonprofit foundation, and it basically said that if you're an
20:57
Speaker 1: investor in the for profit company, as soon as you've
21:00
Speaker 1: made back one hundred times your investment, you don't get
21:03
Speaker 1: anything more, all right, And so that that seemed at
21:06
Speaker 1: the time like one hundred times by investment, that's great,
21:08
Speaker 1: well open ai. Open ai is shot well past that
21:12
Speaker 1: now and and that creates a problem, particularly given that
21:17
Speaker 1: it is sitting side by side with a bunch of
21:20
Speaker 1: other generative AI companies that are investing heavily in improving
21:24
Speaker 1: their project. The only way that you can kind of,
21:27
Speaker 1: you know, do that and stay in competition is to
21:30
Speaker 1: try to figure out a way to raise more money.
21:33
Speaker 1: But when the existing investors have already hit their one
21:36
Speaker 1: hundred times cap, there's no easy way to do it.
21:39
Speaker 1: So open ai was in a clearly a conundrum in
21:44
Speaker 1: you know, the highly competitive environment it now finds itself
21:48
Speaker 1: and it's still the market leader, but you know, a
21:50
Speaker 1: bunch of these other big players didn't have a hand
21:53
Speaker 1: tied behind their back, and so there's been a longstanding,
21:56
Speaker 1: you know, kind of internal debate and discussions that been
22:00
Speaker 1: taking place across the board on how and whether open
22:03
Speaker 1: ai could be transitioned to a place where it'll have,
22:07
Speaker 1: you know, better ability to raise money from outside investors,
22:11
Speaker 1: but still have some controls in place that were pretty
22:16
Speaker 1: much envisioned by the founders that set up open ai
22:20
Speaker 1: to begin with, and so under that existing structure, it's
22:23
Speaker 1: not going to be easy to raise money from anyone,
22:26
Speaker 1: including an IPO, and so they kind of felt that
22:29
Speaker 1: they had to somehow transition to something different, and that's
22:32
Speaker 1: what they've done. They are a Delaware company and they
22:36
Speaker 1: have basically announced that they have transitioned into something known
22:40
Speaker 1: as a public benefit corporation. And these are relatively new
22:46
Speaker 1: structures that basically say you can be a for profit
22:49
Speaker 1: company and have kind of a do good goal at
22:52
Speaker 1: the same time. And Delaware opened up its own statutes
22:55
Speaker 1: to allow these types of companies in about ten fifteen
22:59
Speaker 1: years ago. There haven't been that many takers, quite frankly June,
23:02
Speaker 1: particularly in the in the publicly traded company space, but
23:06
Speaker 1: there are some and so open Ai basically said, well,
23:10
Speaker 1: if we did that, then through that conversion, we could
23:14
Speaker 1: get rid of this one hundred times your investment cap
23:18
Speaker 1: that's been you know, tying our hands. We could still
23:21
Speaker 1: make the foundation, the nonprofit, a big player in the
23:27
Speaker 1: post conversion company. And they have basically you know what,
23:32
Speaker 1: It's been reported that the foundation is going to have
23:34
Speaker 1: a significant amount of stock in the company and is
23:37
Speaker 1: also going to have special rights to fire board members
23:41
Speaker 1: if they don't like what the board members are doing.
23:43
Speaker 1: That is a non trivial amount of control. But by
23:46
Speaker 1: the same token, the handcuffs are now off the ability
23:50
Speaker 1: of investors to to generate a return, and so that
23:54
Speaker 1: has absolutely sowed the seeds for a possible public offering
23:59
Speaker 1: of Open AI. And you know, it's still early days,
24:02
Speaker 1: so we don't know when that's going to occur, what
24:04
Speaker 1: it's going to look like, but it seems pretty clear
24:07
Speaker 1: that if they were going to do a type of
24:09
Speaker 1: a public offering of their stock ownership, this was the
24:12
Speaker 1: type of move that they had to make. And so
24:15
Speaker 1: that's kind of where things are pointing right now. Because
24:18
Speaker 1: Opening is not a publicly traded company, they have not
24:21
Speaker 1: made all kinds of long disclosures about exactly what those
24:25
Speaker 1: different levers of control are. That will happen eventually if
24:29
Speaker 1: they file paperwork for having an initial public offering, but
24:33
Speaker 1: it hasn't happened yet, and you'll be.
24:35
Speaker 3: The one we call when they do.
24:36
Speaker 2: Thanks so much, Eric, as always, that's Professor Eric Talley
24:40
Speaker 2: of Columbia Law School. The federal judiciary hasn't had defurlough's
24:45
Speaker 2: staff during a shutdown in three decades until now. For
24:51
Speaker 2: the first two and a half weeks of the shutdown,
24:53
Speaker 2: the Judiciary tampt into other sources of funding to keep
24:57
Speaker 2: the courts fully functioning.
24:59
Speaker 3: And to keep keep employees paid.
25:02
Speaker 2: But that money has now run out and the federal
25:04
Speaker 2: district courts are using different strategies to manage staffing and caseloads.
25:09
Speaker 2: Joining me is Bloomberg Law reporters Suzanne Monnac So, Suzanne,
25:14
Speaker 2: the federal courts have run out of money.
25:16
Speaker 4: Yes, the Judiciary ran out of funds in mid October.
25:20
Speaker 4: This was the first time that the Judiciary had been
25:22
Speaker 4: required to do shutdown related furloughs of their employees in
25:25
Speaker 4: thirty years. And that's just because they didn't have the
25:28
Speaker 4: reserves that they've had in the past. They've said underfunding
25:31
Speaker 4: by Congress. So we have now entering multiple weeks of
25:34
Speaker 4: a shutdown and the Judiciary employees, if this continues, are
25:38
Speaker 4: going to see their first miss paycheck this coming Friday.
25:41
Speaker 2: Before the Judiciary was able to prevent these furloughs and
25:46
Speaker 2: court closures during a shutdown, why weren't they able to
25:51
Speaker 2: this time?
25:51
Speaker 4: The Judiciary has in the past had the reserves to
25:54
Speaker 4: float payroll during shutdowns, and for example, it managed to
25:57
Speaker 4: avoid having to furlough any employees during the five weeks
26:00
Speaker 4: shut down during President Donald Trump's first term. But Judiciary
26:04
Speaker 4: employees have blamed the furloughs that they've had to have
26:07
Speaker 4: quite a bit sooner this year on tighter margins. They've
26:10
Speaker 4: gotten flat funding from Congress the last few years, and
26:13
Speaker 4: that's effectively a cut due to inflation. So they've just
26:16
Speaker 4: said that this has given them less cushion. So while
26:18
Speaker 4: of course federal workers stop getting paid October first, at
26:21
Speaker 4: the start of the fiscal year, the judiciary had just
26:24
Speaker 4: two weeks of additional funding to keep themselves going, but
26:27
Speaker 4: then after that they haven't had the ability to continue
26:31
Speaker 4: paying employees.
26:32
Speaker 2: So the federal district courts are handling the lack of
26:35
Speaker 2: funds in different ways. For example, some are having the
26:39
Speaker 2: courts close for a day tell us about some of
26:42
Speaker 2: the measures they're taking.
26:43
Speaker 4: That's right, federal courts across the country. The federal districts,
26:46
Speaker 4: i should say, do really operate quite independently. So while
26:50
Speaker 4: we're seeing both furloughs kind of on the administrative side
26:52
Speaker 4: of the judiciary in Washington. We're also seeing different responses,
26:56
Speaker 4: really varying by every single district in the country. Federal courts,
27:00
Speaker 4: as you mentioned, have been closing or limiting services on Fridays.
27:04
Speaker 4: For example, the Middle District of Alabama has said that
27:07
Speaker 4: its courthouses will be closed and its employees furloughed every
27:10
Speaker 4: Friday while this continues. The Federal Court House in Connecticut
27:14
Speaker 4: will be furlowing its clerk's office staff on Fridays. And
27:18
Speaker 4: we're also just seeing a number of courts putting out
27:20
Speaker 4: notices that they're going to be suspending things like travel
27:23
Speaker 4: training programs, and of course many are postponing civil trials
27:27
Speaker 4: that involve the Justice Department. As Low's lawyers are also
27:30
Speaker 4: not getting paid.
27:31
Speaker 2: We should just mention that judges get paid because it's
27:33
Speaker 2: required under the constitution. How are they deciding which workers
27:38
Speaker 2: to furlough and which to keep on the job without pay.
27:41
Speaker 4: There seems to be some discretion and making those decisions.
27:44
Speaker 4: There is a course shutdown guidance under the Anti Deficiency
27:47
Speaker 4: Act which the judiciary is operating under in terms of
27:50
Speaker 4: how to identify who is essential and who is not essential. Activities,
27:54
Speaker 4: for example, include criminal cases, so those cases must continue
27:58
Speaker 4: during shutdowns because they involve liberty of people, and so,
28:02
Speaker 4: for example, the federal defenders are generally classifying their employees
28:06
Speaker 4: as essential since they handle those cases. And of course,
28:09
Speaker 4: since courts have to continue those cases, we are seeing
28:12
Speaker 4: a lot of court staff being deemed essential and having
28:15
Speaker 4: to continue to work, hopefully for back pay later. And
28:19
Speaker 4: so I just think that it's one of those things
28:20
Speaker 4: where courts do have to continue operating during a shutdown.
28:23
Speaker 4: So even though they have run out of money, I
28:25
Speaker 4: think the furloughs are still going to remain somewhat limited
28:27
Speaker 4: since they do have to be able to continue to
28:29
Speaker 4: process cases in some capacity. And some civil cases are
28:32
Speaker 4: continuing as well if the judge considers them important enough
28:35
Speaker 4: to do so.
28:35
Speaker 2: Yeah, I was going to say that a lot of
28:37
Speaker 2: the cases involving Trump administration policies are continuing. For example,
28:43
Speaker 2: we have those two cases over the funding of snap benefits.
28:48
Speaker 4: If a judge tells the Justice Department, I know, you
28:50
Speaker 4: do have to continue showing up and continuing this case,
28:52
Speaker 4: then the Justice Department has to do so. Guidance that
28:55
Speaker 4: DJ had given was to generally request a pause in
28:58
Speaker 4: a case in a civil case where they felt it
29:01
Speaker 4: was appropriate to do so during the shutdown. But if
29:03
Speaker 4: the judge says, no, I disagree, we're too far into this,
29:06
Speaker 4: I want to continue, then those lawyers do have to
29:08
Speaker 4: continue without pay. So really we're out of point where
29:10
Speaker 4: the judge is like the only person getting paid in
29:12
Speaker 4: a courtroom as their staff's not getting paid. Any type
29:15
Speaker 4: of federal government lawyers are not getting paid. Federal defenders
29:18
Speaker 4: are not getting paid in a criminal case. So really
29:20
Speaker 4: it's just the private attorneys in civil cases that are
29:23
Speaker 4: getting paid for their work at this point in the courtroom.
29:25
Speaker 2: So let's talk about the cash crunch how it affects
29:28
Speaker 2: criminal cases. So federal public defenders are not being paid
29:33
Speaker 2: right at this point.
29:34
Speaker 5: That's correct.
29:35
Speaker 4: They did receive a paycheck in October from their work
29:37
Speaker 4: for the first two weeks of the month that there
29:38
Speaker 4: was funding for, so they really haven't actually felt the
29:42
Speaker 4: crunch yet in terms of the paycheck suspension, but they're
29:45
Speaker 4: going to feel that this Friday if this shutdown is
29:47
Speaker 4: still going.
29:48
Speaker 2: So federal public defenders rely on CJA panel attorneys to
29:54
Speaker 2: take clients in cases involving multiple defendants, etc. Tell us
29:58
Speaker 2: about what's been happening those attorneys even before the shutdown.
30:03
Speaker 4: Yes, here the shutdown is really exacerbated an existing underfunding
30:07
Speaker 4: problem for criminal defense CJA or the Criminal Justice Act
30:11
Speaker 4: Panel attorneys. These are private attorneys who take on cases
30:14
Speaker 4: for indigen defendants where federal defenders cannot. Oftentimes that might
30:17
Speaker 4: be a multi defendant case where the defenders are representing
30:20
Speaker 4: one of the defendants but then would have a conflict
30:22
Speaker 4: of interest in representing other ones. There, for example, a
30:25
Speaker 4: CJA panel lawyer would get tapped.
30:27
Speaker 5: To step in.
30:28
Speaker 4: Funding for that panel actually ran out earlier this summer,
30:31
Speaker 4: back in July, and so they actually haven't been paid
30:34
Speaker 4: for about four months now. They had hoped to be
30:37
Speaker 4: reimbursed for their work during that several months period on
30:40
Speaker 4: October first, when new funding came in, but of course
30:43
Speaker 4: that isn't what happened, and the shutdown has continued.
30:45
Speaker 5: So they've been now floading their own.
30:47
Speaker 4: Expenses, as I said, for about four months, and that's
30:49
Speaker 4: including expert witnesses that they might want to bring on.
30:53
Speaker 4: Forensic investigators, those types of people who might be testifying
30:56
Speaker 4: in a case examining mobile cell phone or computer data
31:00
Speaker 4: in the case. Those people are also fronting their own expenses. Now,
31:03
Speaker 4: of course, federal defenders who were previously getting paid I've
31:06
Speaker 4: now joined them and not getting paid. So we're really
31:08
Speaker 4: seeing a pretty significant underfunding for criminal defense in that space.
31:13
Speaker 2: So some lawyers have made motions to have cases dismissed
31:20
Speaker 2: because of this situation. I mean you wrote about one
31:23
Speaker 2: lawyer wrote, you prosecute, you pay, you don't pay, you
31:26
Speaker 2: don't prosecute, complaint, indictment dismissed with prejudice. There are a
31:31
Speaker 2: lot of lawyers trying to have cases dismissed because of this.
31:36
Speaker 4: We're certainly seeing them across this country. I've probably seen
31:38
Speaker 4: close to a dozen at this point, though of course
31:40
Speaker 4: there may be more. We've seen more success with request
31:44
Speaker 4: to postpone cases.
31:45
Speaker 5: Judges seem a little bit more willing.
31:47
Speaker 4: If the defendant who might be in prison is willing
31:49
Speaker 4: to postpone their case, I think the judge is a
31:51
Speaker 4: little bit more willing to do that. I have yet
31:53
Speaker 4: to see if case fully dismissed for a constitutional violation
31:57
Speaker 4: as a result of this underfunding. The six and and
32:00
Speaker 4: My guarantees a right to counsel even if you cannot
32:03
Speaker 4: for an attorney, and so that's where we're seeing some
32:05
Speaker 4: of these arguments being brought under that by nature, the
32:07
Speaker 4: fact that the government hasn't funded criminal defense, and as
32:10
Speaker 4: long as it hasn't would create a constitutional violation.
32:13
Speaker 5: Waiting to see if we.
32:15
Speaker 4: See a judge become receptive to that argument and decide
32:17
Speaker 4: to fully toss the case. There's a number of motions
32:20
Speaker 4: that we're keeping an eye on in that respect, and
32:22
Speaker 4: I think they're only going to continue and proliferate as
32:25
Speaker 4: criminal defense lawyers are sharing templates with each other and
32:28
Speaker 4: sharing the motions if they filed, and what they've had
32:30
Speaker 4: success or not success with.
32:32
Speaker 2: And what's happening at the Supreme Court.
32:34
Speaker 4: So the Supreme Court has actually also run out of funding,
32:37
Speaker 4: and their spokesperson has said that they'll need to make
32:39
Speaker 4: some changes to its operations, including by closing the building
32:43
Speaker 4: to the public and some capacity, but keeping it open
32:46
Speaker 4: for official business, which means that the justices will continue
32:49
Speaker 4: to hear and decide cases.
32:51
Speaker 2: So now let's talk a little bit about Lindsay Halligan.
32:54
Speaker 2: First of all, tell us who Lindsay Halligan is.
32:56
Speaker 4: Lindsay Halligan was previously Trump's personal attorney, and she has
33:01
Speaker 4: been appointed the interim US attorney for the Eastern District
33:04
Speaker 4: of Virginia based just outside of Washington, DC, and she
33:07
Speaker 4: is leading the criminal charges against New York Attorney General
33:10
Speaker 4: Latitia James and former FBI Director James Comey that we've
33:14
Speaker 4: seen last month or so. She's also come under scrutinized
33:17
Speaker 4: by the public and within those cases for the way
33:20
Speaker 4: in which she was appointed. We're seeing those defendants make
33:23
Speaker 4: arguments in court that she was invalidly serving as interim
33:27
Speaker 4: US attorney when those indictments against them were filed.
33:30
Speaker 2: Well, she was hastily installed after the prior interim US
33:35
Speaker 2: attorney refused to bring indictments against some of those on
33:39
Speaker 2: Trump's enemies lists.
33:41
Speaker 5: That's right.
33:41
Speaker 4: She came to the office after a little bit of turnover.
33:44
Speaker 4: We had seen the Biden appointed US attorney for that
33:46
Speaker 4: office resign as is typical, and a new person, Eric Seibert,
33:50
Speaker 4: was brought in. He'd served as an interim term and
33:52
Speaker 4: then has had his term renewed by the Federal District Court,
33:55
Speaker 4: as is the law regarding US attorney appointments. But then
33:59
Speaker 4: he was pushed out after the Trump administration told him
34:02
Speaker 4: he'd be removed for not bringing mortgage fraud charges against
34:05
Speaker 4: Letitia James, even though prosecutors in his office had found
34:08
Speaker 4: that there wasn't.
34:09
Speaker 5: Enough evidence for that.
34:10
Speaker 4: That's when we saw Lindsay Halligan, Trump's former attorney, who
34:13
Speaker 4: has never been a prosecutor before, be brought in and
34:16
Speaker 4: she was willing to sign on to that indictment, both
34:18
Speaker 4: against Letitia James as well as against James Comey, who's
34:21
Speaker 4: been accused of making a false statement to Congress.
34:24
Speaker 2: After her appointment was attacked in court papers by both
34:28
Speaker 2: Comy and James, US Attorney Pam Bondy has given her
34:33
Speaker 2: a new title.
34:34
Speaker 5: That's correct.
34:34
Speaker 4: We're seeing a little bit of maneuvering here on the
34:36
Speaker 4: part of the Trump administration to try to shore Halligan
34:39
Speaker 4: up against some of these claims of having been improperly serving.
34:42
Speaker 4: So we saw just last night court filing where Attorney
34:46
Speaker 4: General Pam Bondy has signed an order on October thirty first.
34:49
Speaker 5: But she's backdating. It's a fact.
34:50
Speaker 4: She's saying it's taking effector retroactively to when Lindsay Halligan
34:54
Speaker 4: took office in September, to add a new title for
34:57
Speaker 4: her that she is the Special Attorney. And this is
35:00
Speaker 4: essentially an effort to try to shore her up against
35:03
Speaker 4: these claims that she might have been invalidly serving at
35:05
Speaker 4: the time that the indictments against James Cove and Letitia
35:08
Speaker 4: James were filed. She's calling it ratifying essentially her appointment
35:12
Speaker 4: as US attorney and claiming that she had the authority
35:15
Speaker 4: to issue those indictments when those.
35:17
Speaker 5: People were charged.
35:19
Speaker 4: And this is really part of a broader pattern of
35:20
Speaker 4: maneuvering that we're seeing at US attorney's offices across the country,
35:24
Speaker 4: particularly in states with two Democratic senators. US attorneys go
35:27
Speaker 4: through the nomination process in the Senate, and senators do
35:30
Speaker 4: have veto power under the blue slit process over those nominees,
35:34
Speaker 4: and so we're seeing in states like Virginia that has
35:37
Speaker 4: two Democratic senators, California, and New York where the Trump
35:41
Speaker 4: administration doesn't want to have to come up to deal
35:43
Speaker 4: with Congress about this, so instead they're kind of taking
35:47
Speaker 4: creative interpretations of some of the vacancy laws to try
35:49
Speaker 4: to get people in that they want in acting her
35:52
Speaker 4: in her own capacities and using things like making them
35:54
Speaker 4: the second in command at the office, thus allowing them
35:57
Speaker 4: to have all of the powers as the first command
36:00
Speaker 4: if that spot is vacant, those types of maneuvering, and
36:02
Speaker 4: so that's just what we're seeing here, and it's something
36:05
Speaker 4: we've seen across the country as well.
36:06
Speaker 3: Though it's quite inventive.
36:09
Speaker 2: We'd all like to be able to say this is retroactive.
36:12
Speaker 2: My mistake doesn't count because I'm now retroactively correcting it.
36:17
Speaker 2: But I doubt that a court is going to allow
36:20
Speaker 2: her to say, oh, by the way, you.
36:22
Speaker 5: Know, well, certainly you have to see.
36:24
Speaker 4: The Justice Department is arguing that Halligan was wildly serving regardless,
36:28
Speaker 4: and they've sort of portrayed this as well, just in case,
36:30
Speaker 4: we're doing this extra thing to make our case even stronger.
36:33
Speaker 4: But we think we have a strong case regardless. That's
36:35
Speaker 4: essentially what their argument has been. There'll be a hearing
36:38
Speaker 4: in this in both criminal cases in about two weeks
36:41
Speaker 4: or in November thirteenth. So interesting to see how the
36:44
Speaker 4: judge receives.
36:45
Speaker 2: US Federal judges in other jurisdictions have ruled against the
36:50
Speaker 2: Trump administration in similar cases. Thanks so much, Suzanne. That's
36:55
Speaker 2: Bloomberg Law reporter Suzanne Monyac And that's it for this
36:59
Speaker 2: edition of the Bloomberg Law Show. Remember you can always
37:02
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37:05
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37:08
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